India’s GDP Growth: Not as Good as It Looks?

India’s gross domestic product growth, which showed that the economy expanded 7.7% in the quarter ended June 30, came as something of a relief to many observers and investors.

Punit Paranjpe/Agence France-Presse/Getty Images

Industrial production is a key component of calculating overall gross domestic product.

Given what the Indian economy has had to put up with – rising interest rates, high inflation, a global slowdown, a lack of new reforms and the distraction of massive anticorruption protests – today’s data can be viewed as a mark of the economy’s ability to weather some nasty squalls.

“The numbers underscore the resilience of growth, leaving inflation as the main policy concern,” writes Leif Lybecker Eskesen, chief economist for India at HSBC. There seemed to be a general view among economists that, even though growth slipped slightly from the 7.8% registered in the previous quarter, the Reserve Bank of India isn’t about to give up its penchant for stringent interest-rate tightening.

Still, there is one small factor, pointed out by Devika Mehndiratta, vice president of emerging markets economic research at Credit Suisse, that adds a slightly different gloss to today’s figures.

While growth as reported looks steady from the previous quarter, what if the previous quarter’s growth rate was 8%, rather than 7.8% and the headlines read this way: “GDP Growth in India 7.7% vs 8% in Previous Quarter.”

People might still praise the robustness of 7.7% given the overall climate; but they might also note that the brakes are being applied pretty quickly.

How could that happen?

Ms. Mehndiratta notes that there was a change in June in how India’s industrial production data is calculated, something that happens every once in a while to set a new base year for statistical calculations and to update the basket of goods that are included in the government’s estimates. In June, according to this report and other reports, the base year was reset to 2004-2005 from 1993-1994. Some new items – ice cream, mobiles and gems – were added while VCRs, typewriters and other out-of-date products were removed.

Industrial production is a key component of calculating overall GDP. In the quarterly data released today, the government used industrial production data for the quarter based on the new base year and the new components. But it has yet to release adjusted GDP readings for previous quarters taking into account the change.

What difference does this make? It is Ms. Mehndiratta’s contention that, if the “new” industrial production index were used to revise the previous quarter’s GDP, then economic growth for the three months ended March 31 would read as high as 8%.

Here is how she put it in her research note: “We suspect that when the government does release revised data for the previous quarter’s GDP growth,” she wrote, there is likely to be an “upward revision in the previous quarter’s GDP growth (to say 8% from 7.8%).”

Her ultimate conclusion on today’s reading: “We take these GDP numbers with a pinch of salt.”

No-one was available at the Central Statistical Organization to comment.

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